Pakistan's Debt Crisis: Fact or Fiction?

[RiazHaq]

http://www.riazhaq.com/2018/01/pakistans-debt-crisis-fact-or-fiction_30.html

Pakistan is taking on significant amounts of domestic and foreign debt to finance its budget deficits and to support major energy and infrastructure development projects as part of China-Pakistan Economic Corridor (CPEC). Over one-third of this public debt is external debt denominated in US dollars, Euros and other hard currencies. At the same time, Pakistan's exports have declined over the last several years and the country's current account deficits have grown.

Critics Warnings:

Critics believe that Pakistan is facing a severe debt crisis. They fear that it could get caught in a big debt trap laid by foreign governments. They warn that Pakistan will go broke. It will be unable to repay these mounting debts. Are they right? To answer this question, Dr. Ishrat Husain, a former central banker and governor of the State Bank of Pakistan, has analyzed Pakistan's debt as of June 30, 2017. Here are some of his key findings:

Pakistan Public Debt-to-GDP Trend. Source: Dr. Ishrat Husain
Total Public and Private Debt:

Pakistan’s total debt and liabilities (TDL) consist of public debt and private debt. Total stock of outstanding debt and liabilities on June 30, 2017 stood at 79% of gross domestic product (GDP). Of this, Gross Public Debt accounted for 85% of the total outstanding or 67.2% of GDP. The remaining 15% is the private debt mostly to borrowers outside the country, for which the government has no fiscal obligation, but the SBP has to provide foreign exchange to service this debt. Within the gross public debt, the government’s share was predominant – almost 92% while the balance was owed by the public enterprises but guaranteed by the government. Borrowing from IMF is also included in gross public debt, although it is a liability of the SBP.

As of June, 2017, Pakistan's total public debt-to-gdp ratio is 67.2%, up from 59% in 2008 and 64% in 2013, according to an analysis by Dr. Ishrat Husain, former governor of the State Bank of Pakistan. The external debt-to-gdp ratio is 20.7%, down from 28.8% in 2008 and 21.3% in 2013. Pakistan's external debt to foreign exchange earnings ratio has shot up to 161.9% from 123.9% in 2008 and 121.3% in 2013.

Total Debt Service as Percentage of GDP. Source: Dr. Ishrat Husain

Debt to GDP Ratio:

Public External Debt is lower in 2017 i.e. 20.7% of GDP while it was 27.1% in 2008 and 21.4% in 2013. About 93 pct of the public external debt falls under the category of Medium and Long term while 7% under the short term. Therefore the risk appetite for further short term borrowing to tide over payment difficulties cannot be ruled out as the short term public external debt to SBP reserves ratio is 5.5%. Concessional loans still form more than half of the outstanding stock and commercial loans account for only 1.6 percent of the total.


Debt Service Share of Government Revenue. Source: Dr. Ishrat Husain
Debt Servicing as Percent of GDP:

Pakistan's current debt servicing requires 5.9% of GDP. It is down from 6% in 2008 and 6.9% in 2013. These percentages are by no means alarming. However, the external debt service component to be repaid in US dollars is of concern because of declining foreign currency earnings.

External Debt Repayment:

A major setback has been caused by stagnation in foreign exchange earnings due to a $ 4 billion drop in export receipts since 2013 .This has raised the EDL (external debt and liabilities) to FEE (foreign exchange earnings) ratio from 121 to 162 in 2017 . There has been some growth in exports in last few months but the pace is unspectacular to make a dent. The other element which is picking up is Foreign Direct Investment but that also won’t be able to lower this ratio significantly. On the fiscal side, almost 24% of government revenues were pre-empted by payments of interest and foreign loan repayments . The average interest rate is down to 6.3 percent with domestic debt being relatively expensive at 8.2 percent.

External Debt as Percentage of Foreign Exchange Earnings. Source: Dr. Ishrat Husain

Summary:

As of June, 2017, Pakistan's total debt-to-gdp ratio is 67.2%, up from 59% in 2008 and 64% in 2013, according to an analysis by Dr. Ishrat Husain, former governor of the State Bank of Pakistan. The external debt-to-gdp ratio is 20.7%, down from 28.8% in 2008 and 21.3% in 2013. Pakistan's current debt servicing requires 5.9% of GDP. It is down from 6% in 2008 and 6.9% in 2013. These percentages are by no means alarming. However, the external debt service component to be repaid in US dollars is of concern because of declining foreign currency earnings. Pakistan's external debt to foreign exchange earnings ratio has shot up to 161.9% from 123.9% in 2008 and 121.3% in 2013. Of these, the critics are absolutely right about the last one---the ratio of external debt to foreign exchange earnings. Pakistan has to heed their warnings and urgently address its declining exports and rising current account deficits to avoid the potential external debt trap.

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http://www.riazhaq.com/2018/01/pakistans-debt-crisis-fact-or-fiction_30.html

 

[xyxmt]

Wait till Imran and economy expert Asad Umer (where is he by the way) destroy Dr. Ishrat hussain`s knowledge and show his PMLN payroll stub.

 

[RiazHaq]

Chinese perceptions of CPEC
ISHRAT HUSAIN
https://www.dawn.com/news/amp/1357043

The Chinese have voiced concerns regarding negative CPEC talk, security and red tape.

Under its One Belt One Road Initiative announced in 2013, China is planning to invest more than $1 trillion in 60 countries all over the world to establish six different corridors. The receptivity in other countries to this proposal has been anything but enthusiastic; however, some Chinese friends are puzzled by the sceptical and negative reactions from certain quarters in Pakistan expressed in the media, particularly on social media. This comes to them as a surprise because of the long uninterrupted record of strong bilateral relations between the two countries that were not even affected by changes in political leadership in either country. CPEC is the first project of its kind to foster economic cooperation on a massive scale for building large infrastructural projects in Pakistan.

Although realising that there are some external forces hostile to this initiative, Chinese analysts and participants are concerned about what they see as the misrepresentation of facts by many Pakistanis. It is not obvious to them as to what purpose is served by raising doubts and fears about CPEC in the minds of the Pakistani population. The aspersions being cast on the motives of the Chinese, such as the analogy with the East India Company or Pakistan becoming a satellite of China, are very unnerving: external detractors of CPEC pick up these reports and after bundling them as ‘risks’ of CPEC to Pakistan, disseminate them widely.

The Chinese argue that the IPPs have been a policy instrument for investment in Pakistan’s energy sector for a very long time. When the country was facing serious energy shortages no one else came to Pakistan’s rescue and invested in the sector. Now that China has come forward with a planned investment of $35 billion or 70 per cent of the total CPEC allocation under the same policy, questions are being raised.

Had it involved extraction of natural resources from Pakistan for the benefit of the Chinese, this criticism would have been justifiable. On the contrary, the benefits of this investment would be exclusively appropriated by Pakistan’s industries and households that would no longer face load-shedding while the country would record a 2pc annual rise in GDP growth.

Chinese state-owned companies, designated by the Chinese government based on their expertise and experience, are executing the projects with loans provided by government-owned banks on concessional terms both in tenor and pricing. In several projects, Chinese and Pakistani companies have entered into joint ventures. The repatriation of profits and debt-servicing in foreign exchange arising out of these obligations would become possible after an increase in the volume of exports as a result of the Chinese-Pakistani joint ventures relocating their industries to the Gwadar Free Economic Zone and the nine industrial zones to be established under CPEC.

In the opinion of some, the negative feelings can have unintended adverse consequences for the personal security of Chinese nationals working on these projects, particularly in some sensitive areas of Balochistan. Some elements unhappy with the Pakistani state and government and possibly acting at the behest of foreign powers hostile to CPEC appear to have created conditions in which the murders and kidnappings of Chinese nationals that were almost non-existent have begun to take place. Our interlocutors were grateful for the new division being raised by the Pakistan Army for protection of the Chinese; but the security risk is raising premiums for relocation to some of the vulnerable areas.

 

[AZADPAKISTAN2009]

However US currency will never lose value....still printed paper can buy goods from world countries for no loss

Does any financial entity down grade USA , in global market ? No
Do they ask US to pay down the debt ? No

 

[RiazHaq]

Pakistan's debt-to-gdp ratio will come down as gdp rises faster than debt with CPEC progress on energy and infrastructure.

However, repaying Pakistan's external debt requires that Pakistan bring in enough US $ and other hard currencies through exports, remittances, foreign investments etc.

A recent BMI report published by the World Economic Forum recently at Davos says that "Pakistan will develop as a manufacturing hub over the coming years, with the textile and automotive sectors posting the fastest growth at the beginning of our forecast period. Domestic manufacturing investment will be boosted by the windfall from lower energy prices compared to the last decade, and improved domestic energy supply."

If CPEC makes it happen, then I think Pakistan will be in good shape with respect to exports and its current accounts.


https://www.weforum.org/agenda/2016/07/these-are-the-10-emerging-markets-of-the-future

 

[liall]

Pakistan's debt-to-gdp ratio will come down as gdp rises faster than debt with CPEC progress on energy and infrastructure.

However, repaying Pakistan's external debt requires that Pakistan bring in enough US $ and other hard currencies through exports, remittances, foreign investments etc.

A recent BMI report published by the World Economic Forum recently at Davos says that "Pakistan will develop as a manufacturing hub over the coming years, with the textile and automotive sectors posting the fastest growth at the beginning of our forecast period. Domestic manufacturing investment will be boosted by the windfall from lower energy prices compared to the last decade, and improved domestic energy supply."

If CPEC makes it happen, then I think Pakistan will be in good shape with respect to exports and its current accounts.


https://www.weforum.org/agenda/2016/07/these-are-the-10-emerging-markets-of-the-future

I dont think thats how it works. If the government is running a fiscal deficit as a % of GDP then the debt will increase in proportion of GDP.

 

[Nothing]

It is just BoP situation where USD come into the picture. I think so China will step in for next couple of years if GOP needs more USD to pay the debt. After 2020 I feel if project under CPEC starts paying off than GOP will be in better situation to pay off debt. But all depends on CPEC. I will say returns will be 50% to 70% on CPEC projects of what government and some other people are selling right now. But for next two years, it will be difficult. Even increased oil prices will factor in from next quarter. GOP needs to start refinancing some of the debt at lower interest rates as GDP is improving.

 

[RiazHaq]

Pakistan’s trade prospects in 2018
Dr Vaqar Ahmed January 7, 2018

http://tns.thenews.com.pk/pakistans-trade-prospects-2018/#.WnKuZJM-d-V

The past few months have seen a decent uptick in Pakistan’s merchandise exports. The first five months of 2017-18 have seen exports grow by 10.5 per cent over the same period during previous fiscal year. The November 2017 monthly export data indicates a growth of 12.3 per cent in comparison to November 2016.

Similarly, during the first four months of the ongoing fiscal year, large-scale manufacturing has posted a growth of 9.6 per cent. Sectors which have posted positive growth include: iron and steel, automobiles, petroleum, food and beverages, electronics, non-metallic products, pharmaceuticals and textile.

While several of the above-mentioned sectors are beneficiaries of the ongoing investments under China Pakistan Economic Corridor (CPEC) programme, it is noteworthy that some key sectors with export potential have seen falling production in the current fiscal year, including leather, engineering products, and chemical sectors.

One hopes that in 2018 the government will be better prepared with feasibilities of all nine Special Economic Zones (SEZs). As of now we understand that even in the existing industrial estates across Pakistan it is a challenge to get new electricity and gas connections.

 

[Hephaestus]

https://www.dawn.com/news/1410234


Pakistan expects to obtain fresh Chinese loans worth $1-2 billion to help it avert a balance of payments crisis, government sources said, in another sign of Islamabad’s growing reliance on Beijing for financial support.

Lending to Pakistan by China and its banks is on track to hit $5bn in the fiscal year ending in June, according to recent disclosures by officials and the finance ministry data reviewed by Reuters.

The ramp up in China’s lending comes as the United States is cutting aid to Pakistan following a fracture in relations between the on-off allies. In February, Washington led efforts that saw Pakistan placed on a global terror financing watch list, drawing anger in Islamabad amid fears it will hurt the economy.

The new Chinese loans that are being negotiated will help bolster Pakistan’s rapidly-depleting foreign currency reserves, which tumbled to $10.3bn last week from $16.4bn in May 2017.

The talks come only weeks after a group of Chinese commercial banks lent $1bn to Pakistan’s government in April.

The reserves decline and a sharp widening of Pakistan’s current account deficit have prompted many financial analysts to predict that after the general election, likely in July, Islamabad will need its second International Monetary Fund (IMF) bailout since 2013. The last IMF assistance package was worth $6.7bn.

Beijing’s attempts to prop up Pakistan’s economy follow a deepening in political and military ties in the wake of China’s pledge to fund badly-needed power and road infrastructure as part of the $57bn China-Pakistan Economic Corridor (CPEC), a key cog in Beijing’s vast Belt and Road initiative.

“I think this month we will get that $1-2bn,” said a senior Pakistan government official, saying the funds will come from Chinese state-run institutions.

A second government official confirmed Pakistan was in “sensitive” talks with Beijing over extra funding for up to $2bn. Pakistan finance ministry officials did not respond to a request for comment.

China’s finance ministry and central bank, who were faxed questions about the loans, did not immediately respond to requests for comment.

Although Pakistan’s economic growth has soared to nearly 6pc, the fastest pace in 13 years, the structural problems with the economy are coming to the fore. It is similar to 2013, when foreign currency reserves dwindled and Pakistan narrowly escaped a full-blown currency crisis.

“The current situation appears to be a replica of what we experienced in 2013, albeit on a slightly larger scale,” said Yaseen Anwar, who was the governor of the central bank, the State Bank of Pakistan (SBP), back in 2013.

The darkening macroeconomic outlook prompted the IMF earlier this month to downgrade its economic growth forecast for Pakistan to 4.7pc for the next fiscal year ending in June 2019, way below the government’s own ambitious target of 6.2pc.

TEMPORARY BRIDGE: Over the past nine months Pakistan has enacted a series of measures to combat its ballooning current account deficit, including hiking tariffs on more than 200 luxury items and devaluing its currency by about 10pc.

In the six months to end of March, Pakistan took bilateral loans worth $1.2bn from China, according to the Pakistan Finance Ministry document reviewed by Reuters. During this period the government also borrowed about $1.7bn in commercial loans, mostly from Chinese banks, finance ministry officials added.

In April, Pakistan’s central bank borrowed another $1bn from Chinese commercial banks to buffer its reserves, State Bank of Pakistan Governor Tariq Bajwa told the Financial Times (FT).

A spokesman for the central bank told Reuters the FT report was accurate. The $1-2bn under discussion would be in addition to that loan. So far, all the measures appear to have had a limited impact on Pakistan’s economy and foreign exchange reserves continue to plummet.

The collapse of the reserves is mainly due to the central bank’s efforts to maintain an artificially strong rupee over the past few years, analysts say. The currency is now trading at about 115.50/116 to the US dollar, down 9.8pc in last six months after two separate devaluations since December.

In the past three weeks, reserves have declined by $1.2bn and now stand at two months worth of import cover.

“This new (Chinese) money is a temporary bridge until August or September, when a new government will come into office and the country will likely opt for a new IMF programme,” said Saad Hashmey, chief economist at brokerage house Topline Securities.

Hashmey and several other economists are predicting another currency devaluation by the end of 2018.

Pakistan may also seek help from Saudi Arabia. The Middle Eastern ally loaned $1.5bn to Pakistan in 2014 to shore up its foreign currency reserves.

RISING EXPORTS: The scale of the task facing Pakistan is huge as the current account deficit widened to $14bn in the first 10 months of the current fiscal year, according to SBP data. Dollar-denominated debt repayments in 2018 are also expected to top $5bn, analysts say.

Part of the problem for Pakistan has been a multi-year consumer boom accompanied by huge imports of Chinese machinery for CPEC projects, which has piled pressure on the current account deficit. More recently, a jump in the oil price has compounded the problem as Pakistan is a fuel importer.

One of the senior Pakistani government officials said the money from China should give the economy breathing space.

He said exports have shot up in the last two months, helped by the devaluation in the rupee, and that should help ease the current account deficit.

However, Pakistan’s central bank appears more nervous as oil prices climb, raising its main policy rate by 50 basis point to 6.5pc on Friday and warning the “the balance-of-payments picture...has further deteriorated”.

 

[Sharky]

I had said it before and will say it again. Chinese will even give 50nbillion in aid to Pakistan to make the cpec success story since it is their vanilla project of OBOR. Anything less of a complete success will be a huge loss of face for the current regime in China. On the flip side Pakistan should not do anything to anger or hamper the chinese benevolence but rather use it to ilk projects especially water management the priority one.

 

[ziaulislam]

real question is how quickly will export pick up, oil prices do and investment go, so far everything looks positive. ...

reserves are strong and unchanged at 16 billion dollars covering 4 months, with govt not requiring to float bonds, if things get worse govt will float bond worth 3-4 billion dollars, but it seems this wasn't needed. chinese loans are always good as they are concessional loan at 1% cheaper even than IMF , bonds will be expensive at 6-7%

looks like pakistan is negotiating two important things, first chinese loans till5 billion dollars , second the ML1 project worth 8 billion dollats, both of which if realizes will pretty much wipe out any fear of CAD crisis


even if pakistan goes to IMF it will be stand off agreement to pay off IMF own debts..but i doubt even this will happen

having said PML N mis managed the CAD issue

about debt, there is no debt crisis, our debt hasnt even crossed 100%..
67% is comfortable margin with goal to bring it down to 60% is well on track

 

[RiazHaq]

#China’s #loans to #Pakistan should drive #economic development, boost its #manufacturing, #exports and #debt repayment ability. #CPEC - Global Times

https://www.thenews.com.pk/print/322593-china-s-loans-to-pakistan-to-lift-debt-repayment-ability


Pakistan expects to obtain $1 billion to $2 billion of fresh Chinese loans to help it avoid a balance-of-payments crisis, Reuters reported. Some observers hope China's economic assistance will help the country avoid having to go to the IMF for a bailout, but the key issue is the sustainability of China's financial help.

China will not be stingy in offering help to Pakistan to strengthen its infrastructure, but China's bank loan is a market-driven commercial decision in line with international practices. The main point is Pakistan's debt repayment ability.

China-based financial organizations stick to a principle of not imposing additional political conditions when providing loans to other countries, distinguishing them from most Western financial institutions like the IMF.

This might be one reason why Chinese loans are welcomed in Pakistan. China is likely to continue to finance new projects in the country but will also assess their debt repayment ability to avert the risk of bad debt. After all, Chinese loans to Pakistan are not a gift.

The multi-billion dollar China-Pakistan Economic Corridor (CPEC) has begun to bring tangible benefits to Pakistan's economy, which is likely to boost Pakistan's debt repayment ability. It's possible that we're entering a virtuous cycle in which Chinese loans promote the development of the CPEC, and this then improves Pakistan's debt repayment ability. However, the South Asian country may need to propel economic reforms to ensure the effectiveness of the loans and allow the local economy to benefit more from CPEC projects.

It is hoped that people will learn a lesson from the IMF's operations. In 2013, the IMF approved a loan plan for Pakistan to support its program to stabilize and rebuild the economy, but the multilateral lender failed to strictly monitor the use of the loans, and in the end they did little for Pakistan's economic development.

Now Pakistan's economy is on an upswing with the help of Chinese loans. Nadeem Javaid, who advises Prime Minister Nawaz Sharif's government and works closely on the CPEC program, was quoted by Reuters as saying last year that debt repayments and profit repatriation from CPEC projects will reach $1.5 billion to $1.9 billion in 2019, rising to $3 billion to $3.5 billion by the following year.

China is likely to strengthen economic collaboration with Pakistan under the CPEC program, in a bid to ensure the effectiveness of the loans. The key to stronger cooperation between the two countries lies in how to improve Pakistan's economic innovation capability and allow the country to develop its own capacity for long-term economic sustainability.

China's loans to Pakistan essentially aim to drive Pakistan's economic development, and thus the loans should be offered in a way that aligns with the local economy and helps restructure the South Asian economy and boost its manufacturing and exports.

 

[ziaulislam]

#China’s #loans to #Pakistan should drive #economic development, boost its #manufacturing, #exports and #debt repayment ability. #CPEC - Global Times

https://www.thenews.com.pk/print/322593-china-s-loans-to-pakistan-to-lift-debt-repayment-ability


Pakistan expects to obtain $1 billion to $2 billion of fresh Chinese loans to help it avoid a balance-of-payments crisis, Reuters reported. Some observers hope China's economic assistance will help the country avoid having to go to the IMF for a bailout, but the key issue is the sustainability of China's financial help.

China will not be stingy in offering help to Pakistan to strengthen its infrastructure, but China's bank loan is a market-driven commercial decision in line with international practices. The main point is Pakistan's debt repayment ability.

China-based financial organizations stick to a principle of not imposing additional political conditions when providing loans to other countries, distinguishing them from most Western financial institutions like the IMF.

This might be one reason why Chinese loans are welcomed in Pakistan. China is likely to continue to finance new projects in the country but will also assess their debt repayment ability to avert the risk of bad debt. After all, Chinese loans to Pakistan are not a gift.

The multi-billion dollar China-Pakistan Economic Corridor (CPEC) has begun to bring tangible benefits to Pakistan's economy, which is likely to boost Pakistan's debt repayment ability. It's possible that we're entering a virtuous cycle in which Chinese loans promote the development of the CPEC, and this then improves Pakistan's debt repayment ability. However, the South Asian country may need to propel economic reforms to ensure the effectiveness of the loans and allow the local economy to benefit more from CPEC projects.

It is hoped that people will learn a lesson from the IMF's operations. In 2013, the IMF approved a loan plan for Pakistan to support its program to stabilize and rebuild the economy, but the multilateral lender failed to strictly monitor the use of the loans, and in the end they did little for Pakistan's economic development.

Now Pakistan's economy is on an upswing with the help of Chinese loans. Nadeem Javaid, who advises Prime Minister Nawaz Sharif's government and works closely on the CPEC program, was quoted by Reuters as saying last year that debt repayments and profit repatriation from CPEC projects will reach $1.5 billion to $1.9 billion in 2019, rising to $3 billion to $3.5 billion by the following year.

China is likely to strengthen economic collaboration with Pakistan under the CPEC program, in a bid to ensure the effectiveness of the loans. The key to stronger cooperation between the two countries lies in how to improve Pakistan's economic innovation capability and allow the country to develop its own capacity for long-term economic sustainability.

China's loans to Pakistan essentially aim to drive Pakistan's economic development, and thus the loans should be offered in a way that aligns with the local economy and helps restructure the South Asian economy and boost its manufacturing and exports.

we could have achieved the same amount of influx of foreign capital via engaging the WB and AB satisfactory on some projects that are delayed and working on railway upgrade 8 billion dollar deal rather than having issues on mere 500 million cost differentiation

i think govt didnt appropriately engage WB/AB, it should have been more aggressive

the problem with Chinese loan is lack of international competitive bidding though bidding does

i think we should make this a sticky thread as every other day you will get a misleading thread from Indians

CAD crisis as previously was artificially created to protect the rupee with zero thought going into exports by any govt